Even though the market is recovering from the last two weeks, health care companies are still trading at steep discounts and would be worth picking up.
This article published with permission from InvestmentU.com.
The market’s violent sell-off over the past two weeks took down many good stocks along with the bad ones. Even with the quick bounce, quality companies are still trading at steep discounts to where they were just two weeks ago and are now at very attractive valuations.
This is especially true in the health care sector, where names like Gilead Sciences (Nasdaq: GILD), which is down 12%, are still below where they were trading prior to the debt crisis decline.
Whether the United States’ credit is rated AAA or AA+ should have no bearing on sales of Gilead’s leading HIV drugs or whether its newest drug, Quad, will receive FDA approval. The stock trades at just 11.2 times earnings despite expectations of 15% annual earnings growth over the next five years.
The large pharmaceutical companies also took it on the chin, although many are on the road to recovery. Still, they appear attractive considering the rich yields that many of them offer.
It’s true that many blockbuster drugs like Bristol-Myers Squibb’s (NYSE: BMY) blood thinner Plavix and Merck’s (NYSE: MRK) asthma treatment Singulair lose their patents next year, but those issues have been talked about ad nauseum and have been priced into the stocks for a while.
An area that got hit particularly hard is health care equipment and device makers, which are still down as much as 15% from just two weeks ago.
One of the worst hit is spinal surgery device maker NuVasive (Nasdaq: NUVA), which is still off by about a third from when the market slide began. NuVasive is expected to grow earnings 18% annually over the next five years.
Its competitor, industry giant Medtronic (NYSE: MDT), is still lower by 15% from just two weeks ago. Medtronic pays a 3.1% dividend yield and is trading at just nine times the projected 2011 earnings.
Not surprisingly, many of the smaller speculative names are still down big. For example, Lexicon Pharmaceuticals (Nasdaq: LXRX) recently reported strong Phase II results for its carcinoid syndrome drug last week. But that couldn’t stop the massive selling that gripped nearly every stock. As a result, the stock is 26% lower than where you would have bought it before the strong results were announced.
About the only area I wouldn’t touch in health care are nursing homes, long-term care facilities and home health care companies. Medicare cut reimbursements to home health care by 5% this year and is likely to do so again next year.
Nursing homes will see a cut of 11.1%, or nearly $4 billion, which should have a significant impact on revenue and earnings. The cuts take place on October 1.
Avoid stocks like Kindred Healthcare (NYSE: KND), which has nearly $1.5 billion in debt and will see earnings and cash flow decline in 2012. It will be very difficult for these companies to return to meaningful growth when an important contributor to their revenue is the U.S. government (via Medicare), which isn’t feeling too generous when it comes to entitlements these days.
Other than companies involved in long-term care, the health care sector is trading at bargain prices. Whether you’re looking for growth, income or speculation, there are quite a few names from which you can choose.